Big payment changes for South Africa

Africa’s cross-border payments are plagued by high costs and complexities, which hinder economic growth, but FinTech solutions are changing the landscape with faster and cheaper alternatives.

Sales vice president of Fintech Africa at TransUnion, Mladen Čolić, said cross-border payments are the financial backbone of trade and remittances in Africa.

Despite their importance, though, they remain fraught with high costs, slow processing times, and regulatory complexities.

“As Africa cements its place as a hub of economic growth and innovation, reimagining cross-border payments is imperative for financial inclusion and economic integration,” Čolić said.

“Africa’s fragmented financial landscape presents a major hurdle to seamless cross-border transactions. With 54 countries, multiple currencies, and diverse regulatory frameworks, payments across borders remain costly and inefficient.”

“Africa is the most expensive region in the world to send money to, with an average cost of 8.4% to send $200 in Q1 2024.”

According to RemitScope Africa, remittance inflows totalled an estimated $90.2 billion (about R1.68 trillion) in 2023, accounting for 5.2% of Africa’s total GDP.

South Africa is in an especially troublesome position. The International Monetary Fund ranked it the most difficult place to do business in the world. Out of the 49 countries measured, South Africa came in last.

“Beyond costs, the continent’s reliance on traditional banking networks’ settlement times has played a part in limiting financial accessibility,” Čolić said.

“Many African businesses, particularly small and medium enterprises, face liquidity constraints due to sluggish transaction processing and the complexities of foreign currency availability.”

“The inability to facilitate real-time settlement continues to hinder economic participation and growth.”

Despite these challenges, Africa is at the forefront of financial innovation, Čolić explained.

FinTech solutions such as mobile money and blockchain are reshaping the cross-border payment landscape.

“Mobile wallets are providing a faster and more cost-effective alternative to traditional banking channels, allowing consumers to send and receive funds with minimal friction,” he said.

“As financial technology advances, these mobile money platforms are bridging the gap for individuals and businesses that lack access to conventional banking services, enabling a more inclusive financial ecosystem.”

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Blockchain, stablecoins and credit

Although blockchain technology and cryptocurrencies still face volatility and regulatory concerns, Čolić said that they present an exciting opportunity for transforming cross-border transactions.

“Stablecoins offer a promising alternative by reducing transaction costs and enhancing settlement speed.”

“Nigeria, Ethiopia, and South Africa are already seeing substantial adoption, with Ghana introducing the E-Cedi, a central bank digital currency (CBDC), as a stable and regulated option for digital transactions.”

At a broader level, regional payment systems are demonstrating the potential for streamlined and cost-efficient transactions.

“The Pan-African Payment and Settlement System (PAPSS) and initiatives like BankservAfrica’s Rapid Payments Programme (PayShap) in South Africa are pioneering efforts to create unified payment rails, enhancing efficiency and reducing friction and more importantly, cost, across the continent’s financial networks.”

While technological advancements are reshaping cross-border transactions, Čolić stressed that the role of credit bureaus cannot be overlooked.

“Credit bureaus serve as critical enablers of financial inclusion, helping lenders gain valuable insights into individuals’ and businesses’ credit performance and histories,” he said.

“However, in the evolving digital finance landscape, they must adapt and expand their reach beyond traditional credit data.”

Beyond conventional credit metrics, alternative data sources present an opportunity to bridge the financial gap for the unbanked and underbanked populations, Čolić added.

“Remittance flows, mobile money transactions, and digital payment histories can serve as credible indicators of financial behaviour.”

“Similarly, cross-border payments can also become a measurable attribute for individuals to build creditworthiness.”

“Imagine, for instance, that a remittance received consistently from a relative abroad can be leveraged as proof of income, enabling access to credit in the recipient’s country.”

Čolić said that similarly, frequent mobile wallet transactions can indicate financial responsibility, creating pathways to formal financial services.

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Data, trust and inclusion in FinTech

“Financial institutions, in collaboration with credit bureaus, can develop models that use such data to assess creditworthiness, expanding financial access to millions,” Čolić explained.

“With greater reliance on digital transactions and data-driven credit scoring, ensuring consumer trust and robust data protection and regulatory compliance is of great importance.”

“New technologies such as privacy-preserving platforms, tokenisation and cryptographic techniques, are finding their ways to mainstream adoption, ensuring compliance with evolving regulatory frameworks.”

Additionally, Čolić said that a seamless flow of financial data across borders could enhance risk assessment and fraud detection.

This will reduce default rates and improve financial transparency.

“By working closely with FinTechs, regulators, and financial institutions, credit bureaus can help create a more integrated, inclusive, and secure cross-border financial ecosystem,” he said.

According to Čolić, empowering consumers with financial knowledge is equally critical.

“Many consumers in Africa remain unaware of how credit systems function and how behaviour such as making consistent payments can improve their credit profile to make it possible to access loans.”

By integrating financial literacy programmes into digital platforms, including gamified learning tools and AI-driven credit coaching, credit bureaus can play a vital role in equipping individuals with the knowledge they need to navigate the evolving financial landscape.

“The evolution of cross-border payments in Africa hinges on innovation, regulatory cohesion, and inclusive financial infrastructure.”

“While FinTech advancements are accelerating accessibility and affordability, credit bureaus can play a vital part in formalizing a valuable source of alternative data into its credit scoring that could prove to be a powerful enabler in driving financial inclusion on the African continent.”